Federal Reserve Chair Jerome Powell said on Monday that the central bank's current policy stance allows it to "wait and see" how sharply higher oil prices tied to the ongoing Middle East conflict will feed into U.S. inflation and economic growth.
Speaking in a moderated discussion at Harvard University, Powell largely echoed comments he made earlier this month at the conclusion of the Fed's most recent monetary policy meeting. He stressed that the central bank's instruments operate by influencing demand and that they do not typically generate meaningful short-term effects in response to abrupt oil supply disruptions.
"Energy shocks have tended to come and go pretty quickly. Monetary policy works with long and variable lags," Powell said.
Powell explained that raising interest rates to counter inflationary pressure originating from a jump in oil prices would likely be reflected in the economy only after the oil shock had passed. At that point, he warned, the tightening could act as an added drag on economic activity instead of addressing persistent inflation.
The chair reiterated the Fed's position established earlier this month when policymakers left interest rates on hold as broadly expected. In its post-meeting materials, the Fed's updated dot plot indicated that policymakers still project at least one rate cut within the year. The Summary of Economic Projections accompanying that guidance also showed expectations for higher core PCE inflation in the current year.
On the difficulties of drawing confident conclusions, Powell said reporters that if one element of the recent SEP could have been omitted it would have been that projection. He emphasized the wide range of possible outcomes and the limited certainty surrounding them.
"The thing I really want to emphasize is that nobody knows. The economics effect could be bigger, they could be smaller, they could be much smaller or much bigger. We just don't know. So people are writing down something that seems to make sense to them but have no conviction," he had said, remarks he again underscored at Harvard.
Powell's comments placed a spotlight on the timing challenge the Fed faces: monetary policy operates with long and uncertain lags, while energy price swings can be rapid and transient. That timing mismatch underpins the central bank's current inclination to observe incoming data and allow the full effects of the oil price shock to reveal themselves before making further policy adjustments.
What this means
- Policymakers are cautious about reacting quickly to energy-driven inflation because policy tightening may materialize after the shock fades.
- The Fed left rates unchanged earlier this month and continues to signal at least one cut later in the year, while also noting higher core PCE inflation expectations for the current year.
- Uncertainty about the size and persistence of the oil-driven shock remains a central consideration for near-term policy decisions.